DALLAS (AP) – Delta and United have become the most profitable U.S. airlines by targeting high-end customers while also winning over a large segment of travelers on tight budgets.
That puts pressure on low-cost carriers like Spirit Airlines, which filed for bankruptcy protection on Monday. Some travel industry experts think Spirit’s troubles show that budget travelers will be left with fewer options and higher prices.
Other discount airlines are in better financial shape than Spirit, but they are also lagging behind full-service airlines when it comes to recovering from the COVID-19 pandemic. Many industry experts think Frontier Airlines and other so-called ultra-low-cost carriers will fill the gap if Spirit shrinks, and that there is still plenty of competition to keep prices from rising.
Spirit Airlines has lost more than $2.2 billion since the start of 2020. Frontier hasn’t reported a full-year profit since 2019, though that decline may end this year. And Allegiant Air’s parent company is still profitable, but less so than before the pandemic.
Those numbers — and his airline’s promotion — led United Airlines CEO Scott Kirby to declare recently that the low-cost carriers were operating a “flawed business model” and that customers hated flying on them.
Kirby’s touchdown dance may seem premature, but many analysts are wary of the near-term prospects of budget airlines, which charge cheaper but higher fees than major airlines.
Which airlines have low-cost airlines?
Low-cost airlines have grown over the past two decades by undercutting large companies in ticket prices, thanks in large part to lower costs, including hiring young workers who were paid less than their counterparts at Delta Air Lines, United and American Airlines. Wages have risen across the industry over the past two years, however, offsetting that cost advantage.
At the same time, major airlines launched and modified their low-cost, “basic economy” tickets to compete directly with Spirit, Frontier and other budget carriers for price-conscious travelers.
Budget airlines are also less efficient at using planes and people. As their growth slowed, they grew more of both than they needed. In 2019, Spirit flights were in the air an average of 12.3 hours every day. This summer, planes spend an average of two more hours each day sitting on the ground, where they don’t make money.
Spirit’s cost per mile is down 32% between 2019 and 2023.
Another problem is that airlines have added too many flights. Budget airlines and Southwest Airlines were among the worst offenders, but full-service airlines were overwhelmed. To offset the decline in business travel, major carriers have added more flights to domestic leisure routes. The result: More seats on flights to popular tourist destinations like Florida and Las Vegas, which have driven down prices, especially for premium tickets.
Tom Fitzgerald, an airline analyst at TD Cowen, said that after doing a good job of fixing their basic economics, major airlines are now enjoying growth on the premium side of travel.
“After COVID, people seemed willing to pay more to have a better experience” for flights and accommodations, he said, “and legacy carriers are in a better position to meet that demand. They have premium economy, they have first class.”
Looking for ‘something a little better’ in the air
Low-cost airlines respond by following the old adage that if you can’t beat me, join me. That means making more money, following the fastest growing household wealth among high earners.
Frontier Airlines organized its fares into four bundles in May, where buyers of premium tickets get extras like priority boarding, extra lounge space, and checked bags. The airline has reduced the cost of changing tickets or canceling without the cheapest bundle.
Spirit followed in August with similar changes, banning middle seats and charging passengers more for comfort seats and window seats.
JetBlue Airways, which began flying more than 20 years ago as a low-cost carrier with a few amenities, is trying to escape years of heavy losses. Under new CEO Joanna Geraghty, the first woman to lead a major American airline, JetBlue is cutting unprofitable lines, strengthening key markets including the Northeast and Florida, and delaying the delivery of $3 billion worth of new planes.
Perhaps the biggest change is coming to Southwest Airlines. Starting next year, Southwest will do away with the century-old tradition of “open seats” — passengers selecting their seats after boarding the flight. Executives say that extensive research has shown that 80% of customers prefer their assigned seat, and that’s especially true of desirable business travelers.
Coming out of the pandemic, “there’s a clear choice for more premium,” said Southwest CEO Robert Jordan. the rise of the desire for a premium, something a little better. “
Jordan said it’s not clear why demand for premium products and experiences has grown so quickly, but wealth statistics offer one explanation.
One in five US households by income added $35 billion as of 2019 and hold nearly nine times the wealth of the middle fifth, according to the Federal Reserve. That gives wealthier households more money to spend on luxury travel.
Overcrowded flights may push passengers to spend more to escape the middle seat in the back of the plane.
Whatever the reasons, Delta executives say they expect premium ticket sales to surpass the airline’s revenue from main-cabin tickets by 2027.
America’s problem?
In other parts of the world, budget carriers are doing well. They are back in the epidemic as highbrow competitors.
Some industry experts say low-cost carriers in Asia and Europe have been attracting a diverse mix of passengers, while in the United States, the wealthy and middle class look down their noses at low-cost carriers.
Jamie Baker, an analyst at JPMorgan, says he has many college friends who work in London and fly Irish airline Ryanair all the time, but he doesn’t know anyone who has ever been on a Spirit or Frontier flight.
“There is no discrimination against anyone flying Ryanair or easyJet in Europe. Meanwhile — not to criticize Spirit or kick them on the ground — but it’s a kind of airline call,” Baker recently told an audience of airline pilots, who roared with laughter.
Looking at the competition
Delta CEO Ed Bastian is less dismissive of “low-cost carriers” in the US than United’s Kirby.
“I don’t see that part ever going away,” Bastian said this week, after Spirit filed for bankruptcy. “I think there is a market for you.”
At the same time, he said the increase in the rate of low-cost carriers has no effect on his airline. Delta has targeted high-end travelers but also introduced basic economy fares over the past decade, when discounts emerged as a growing threat to poach other Delta customers.
“Just calling yourself a premium carrier and actually being a premium carrier are two completely different things,” said Bastian. “It’s not about the size of the seat or how much room you have; the whole experience.”
